Delay in bringing the Boeing 737 Max aircraft back to operations may hurt SpiceJet, but the airline could limit some of the losses if a multi-million dollar compensation from the American aircraft manufacturer comes by.
Boeing is in discussion with its clients world over, and has settled the compensation amount with a few, including American Airlines, Southwest Airlines and Turkish Airlines.
While the American manufacturer hasn’t disclosed the amount, it is said to run into hundreds of millions of dollars.
The chatter of compensation has gathered pace after Boeing revealed on January 22, that it won’t get regulatory approvals to bring back the Max aircraft in air, before June or July this year. The delay comes after a new software flaw was discovered.
The Max aircraft, which were operated by 59 airlines – including SpiceJet and Jet Airways in India – were grounded in 2019, after twin crashes that killed more than 300 fliers. At the time, 387 Max aircraft were in use, and Boeing had orders for more planes worth $500 billion.
In the case of SpiceJet, 13 of its Max aircraft were grounded. Additionally, about 15 more these planes were ready to be delivered. Overall, the airline had ordered 205 Max aircraft.
Pointing out that the delay in getting back the aircraft will stress SpiceJet’s balance sheet, Santosh Hiredesai of SBICAP Securities, added that the airline’s stock “could remain under pressure until there is visibility on return of MAX into service.”
Hiredesai added that “yields for SpiceJet have started to moderate…the cost rationalisation by inducting Max fleet was key to hold profitability which is now thwarted due to ageing fleet.” The rest of the airline’s fleet is now about 10 year old, leading to higher fuel and maintenance costs.
While Hiredesai said that claims from Boeing may take a while, the airline will be hoping that the compensation makes up some of the losses it has suffered due to the grounding, and now the delay.
The key question is now is this: how much compensation will SpiceJet get?
While the airline didn’t comment, experts say that the final amount will depend on many factors.
Every new aircraft contract comes with a compensation clause, similar to a product warranty. “If a part malfunctions within a negotiated time frame, the repair cost is borne by manufacturer. In addition, they pay the airline on the basis of man-hours spent on replacing the part,” says an industry veteran who goes by the Twitter handle [email protected]
The compensation will also factor in how long the aircraft has been grounded, and thus the resulting loss of revenue. There are also other costs, including storage, lease, legal, that may be included, added the industry executive.
Even the aircraft configuration, adds Ajay Ajay Awtaney, editor of Indian aviation website, http://livefromalounge.com. “For instance, Ryanair has 200 passengers per aircraft compared to 180ish for most other airlines. That is a factor too,” he said.
In the end, it all depends on how well SpiceJet has negotiated its contracts.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
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